In large corporate entities, intellectual property is often placed and moved around to improve the company’s tax position. The IP department may not be consulted on the shift, finding out only at the last minute when it is asked to execute the assignments that the ownership is changing. Mars, Inc. v. Coin Acceptors, Inc. demonstrates some pitfalls with licensing subsidiaries to intellectual property rights and moving ownership. At the end of the day, Mars lost years’ worth of damages and its recovery was limited to a reasonable royalty rather than lost profits, all because of its corporate structure and shifting patent ownership during the suit.

Mars, the candy company, owned patents for vending machine coin changers. Mars did not make the coin changers; instead, its wholly-owned subsidiary, Mars Electronics International, Inc. (MEI-US), did. Before 1996 MEI-US had a royalty-bearing, non-exclusive license from Mars for the patents whereby MEI-US would pay Mars on the gross sales of changers it sold. On January 1, 1996, as part of a settlement of a tax dispute with the UK tax authorities, Mars entered into agreements with MEI-US and another subsidiary also called Mars Electronics International (MEI-UK), a UK company that also had a non-exclusive, worldwide license to the patents. In the transaction Mars assigned all the rights in the subject patents to MEI-US.

In 1990, before the assignment of the patents to MEI-US, Mars had sued Coin Acceptors (Coinco) for patent infringement. The assignment of the patents to MEI-US in 1996 gave Mars a standing problem, though, since it no longer owned the patents-in-suit. To repair the problem, in March, 2006 Mars and MEI-US entered into a purchase agreement selling some parts of the MEI-US business back to Mars. The purchase agreement was not entered into evidence; counsel for Mars stated that the purchase agreement “did not clearly state what [was] needed to be stated for this case,” and that it would “not rear its ugly head” in the litigation.” (Brackets in case). Instead, it entered into evidence an April, 2006 “Coinco Confirmation Agreement.” That agreement said “Mars and [MEI] do hereby acknowledge that Mars owns and retains the right to sue for past infringement of the Litigation Patents.”

As a result of the original structure and license, i.e., Mars’ ownership and MEI-US’s non-exclusive license, Mars could not recover lost profits for Coinco’s infringement. Mars argued that MEI-US’s lost profits flowed “inexorably” to it, so it should be able to recover lost profits. The problem was the license terms; MEI-US owed Mars royalty payments whether it made a profit or not. The income to Mars would not have been affected by MEI-US’s profit losses or gains, so MEI-US’s lost profits did not flow “inexorably” to Mars. As a result, Mars was entitled only to a reasonable royalty for Coinco’s infringement.

Mars tried to amend its complaint to add MEI-US as a plaintiff on the pre-1996 infringements so that MEI-US would have a lost profits claim, but it was unsuccessful. MEI-US was not an exclusive licensee (the only non-owner that can bring a patent infringement suit) because MEI-UK was also a licensee with a territory that included the United States.

Although Mars could only get a reasonable royalty for the infringing products before 1996, it could collect nothing for infringement after that. The Confirmation Agreement, designed to allow Mars to collect damages for the period after 1996 when MEI-US was the owner, was ineffective. While under Schreiber Foods, Inc. v. Beatrice Cheese, Inc., 402 F.3d 1198 (Fed. Cir. 2005) it is possible to retroactively correct a jurisdictional defect that arises during a suit by transferring the patents back to the original owner, it was ineffectively done in this case. The Confirmation Agreement by its terms only assigned the right to sue, not full ownership of the patents, so the standing problem was not corrected before the entry of judgment.

Mars managed to escape one bullet, though. In the UK tax action Mars stated that “the historical royalty payment with respect to the Covered Intellectual Property was excessive to the extent it exceeded a net royalty of 4% . . . .” The lower court had awarded a 7% royalty, which Coinco argued Mars admitted was excessive. The appeals court pointed out that it was an intra-company license agreement, not to a competitor, so there was no error in awarding a 7% royalty rate.

The case reveals how things can go wrong. The original license, while probably favorable for tax purposes, limited Mars’ recovery theories. It seems unlikely that a UK subsidiary performing the same function as a US subsidiary would actually exploit the patents in the US, but presumably there was a tax benefit to such a wide-reaching license. The assignment in settlement of the UK tax problem may have solved the UK tax problem, but it killed all patent damages after that. Finally, while there was a theoretical way to recover from the harm caused by the assignment, it was not effective here. The “Confirmation Agreement” was probably worded as carefully as possible to avoid breaching the UK tax settlement or upsetting Mars’ tax position, but unfortunately it couldn’t go far enough to correct Mars’ standing problem. And while Mars was able to avoid the harm caused by its statement that anything beyond a 4% royalty was excessive, another plaintiff might not be so lucky.

There’s no right or wrong way to manage ownership of IP to capture the full benefit for the company. Here, this may have been the outcome that Mars anticipated, because it was the best way to handle both its patent infringement and tax problems. But the case serves as a reminder that everyone in the company should be talking.

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Ms. Chestek is admitted to practice in Connecticut, the District of Columbia, Massachusetts, New York and North Carolina and is Board Certified by the North Carolina State Bar's Board of Legal Specialization in Trademark Law.

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